New NPS, EPF rules: Should you rethink your retirement strategy?

NPS changes

A new Multiple Scheme Framework (MSF) has been introduced under the National Pension System (NPS), allowing pension fund managers (PFMs) to design and offer more than one scheme across asset classes. Previously, each PFM could offer only a single common scheme per asset class. Under the MSF, non-government subscribers will have a wider choice, including high-risk options that can allocate up to 100% of assets to equity, a significant shift from the earlier 75% cap. The framework also permits more flexible asset allocation.

Notably, the new schemes come with a minimum vesting period of 15 years, after which subscribers may choose to exit at the age of 60 or upon retirement, replacing the earlier structure that effectively locked funds until the age of 60.

For a long time, the lock-in period until age 60 has been a deterrent. While a minimum vesting period of 15 years may sound more appealing, the requirement to annuitize 40% of the corpus—as is currently the case—will still not encourage people to take up the NPS. In any case, under the existing scheme, premature withdrawal can be made after five years, with 80% of the amount being annuitized. Hence, there doesn’t seem to be that much benefit as has been made out.

The new schemes ultimately make retirement planning more complicated. Ten new schemes have been launched in the last month, each with a different asset allocation, making them difficult to assess. The existing NPS scheme is straightforward and investors simply need to decide on their allocation or use the auto-choice option.

Similar to mutual funds, investors will now need to evaluate various NPS schemes based on asset allocation and risk profile, thereby increasing the complexity for investors. Already choosing a mutual fund is a daunting task; adding these new schemes will only make investing more painful. The NPS also does not have the same data availability as mutual funds. Basic data, such as rolling returns on the NPS, is not available, even for financial advisors.

According to Nobel Prize-winning economist Richard Thaler’s book Nudge, keeping it simple, easy, and making the default automatic got more people to take up pension plans. Furthermore, reducing the number of plan options within the mandatory pension schemes made it even simpler for people to choose the most effective plan. The beauty of the existing NPS is its simplicity, ability to drive disciplined investing and the lock-in, all of which help in creating a good retirement corpus.

EPF tweaks

For years, the EPF played that role. But that is set to change. The Employees' Provident Fund Organization (EPFO) has made partial withdrawals easier. Now, up to 75% of the corpus can be withdrawn just 12 months after service (versus 5-7 years earlier). The paperwork to withdraw for special circumstances, such as unemployment, has also been eliminated.

All these measures have made partial access to EPF easier and faster. The risk with this is that individuals may tend to fall back on the EPF for major goals such as child education or home purchase, thus putting their retirement savings in trouble.

Withdrawing from the EPF is not recommended as it interrupts the compounding on the corpus (compounding works best when money stays invested for long periods, as every year’s earnings generate their own earnings. By withdrawing the corpus partially, the timeframe gets shortened, and one will miss out on the biggest growth that typically comes in the later years.

While all these measures seem to be making retirement schemes more investor-friendly, the need of the hour for investors is to actually focus on creating the right amount of corpus for retirement. It is widely seen that people are saving for retirement in some form, but the amounts may not be in tune with what is required on an inflation-adjusted basis. Allowing easy withdrawals may further accentuate the problem, leaving individuals with inadequate retirement savings.

This is compounded by the phenomenon of choice paralysis arising from the presence of multiple schemes. While savvy investors may consider some of the riskier options, for most investors, remaining invested in the EPF and choosing simple investments, such as the existing common schemes under the NPS, can help reach the target retirement corpus.

Stakeholders need to work on bringing back the mindset of retirement security, for which they need to educate Indians on the importance of long-term investing. For early retirees, the Pension Fund Regulatory and Development Authority can consider making amendments to exit rules.

Views are personal.

Mrin Agarwal is the founder-director, Finsafe India.